After the carnage of the 2008 crash, former Federal Reserve Chairman Paul Volcker proposed a rule that would prevent banks from making short-term proprietary trades with financial instruments. In other words, no gambling allowed. This rule would become known as The Volcker Rule, and it went into partial effect on April 1, 2014. Full compliance is required by July 21, 2015. Of course, the bank lobbyists were hard at work, and numerous exceptions and loopholes were created. The definition of "financial instruments" did not include currencies, despite the fact that currencies are the basis of the modern financial system and should be considered the ultimate financial instrument. Also, banks were allowed to "hedge" their risks. As JPMorgan demonstrated in 2012, apparently, it is possible to lose $6 billion while hedging risks with credit derivatives.

JPMorgan is at it again – this time, with the Swiss franc. On January 15 of this year, the Swiss Central Bank sent shockwaves around the financial world when they abruptly abandoned the 1.20 EURCHF floor.

The Wall Street Journal reported that JPMorgan made up to $300 million in the ensuing trading chaos. With the FX market facing a severe shortage of liquidity, JPMorgan stepped in. However, as with any illiquid market, the dealers call the shots. Bid/ask spreads can explode, creating enormous transaction costs for anyone who has to trade. These parties included desperate retail FX brokers and small clients who were bankrupted by the Swiss central bankers. As the WSJ reported,

J.P. Morgan filled client orders at a certain rate, allowing them to quickly assess their position and continue trading when liquidity dried up in the market, this person said. The bank told clients it would fill orders at 1.02 francs per euro while the Swiss currency grew from 1.20 francs per euro to nearly .85 on Jan. 15, the person said. It is unclear how long the bank offered this rate to clients.

By setting the fill 15% away from the last price, JPMorgan was able to lock in any gains from a long franc position instantly. It also gave the firm's traders an anchor so they knew where they were at. What if the clients could get a more advantageous rate at another bank? It didn't matter. 1.02 was the price. If JPMorgan's traders saw a better rate elsewhere, they could trade with that third party and effectively arbitrage the market against their own clients. Of course, it was all transparent. You knew you were getting 1.02, but if your bankrupt broker is margin calling you at any price, there's not much you can do. It was JPMorgan's market.

With free reign to trade currencies and under the guise of "market making," JPMorgan raped the accounts of retail FX brokers and small clients who never could have imagined that the Swiss Central Bank would turn the stable franc into one of the most volatile currencies of the decade. It also appears that The Wall Street Journal overstated the $300 million headline number. According to JPMorgan, they made about $200 million that day.

The fact that JPMorgan still takes value at risk (VAR) seriously is another irony. Wall Street anti-hero Nassim Taleb has made multiple fortunes betting on improbable events via out-of-the-money put options, and he remains one of the most steadfast critics of VAR. Taleb has an arcane style of communication, but the summary of his criticism is that VAR is based on the normal distribution, which underestimates the effects of extreme price moves. Furthermore, the very idea that wild events can be predicted by any model is an arrogant assumption, according to Taleb. A white paper by the Chicago Board Options Exchange (CBOE) verifies Taleb's assertions.

The chart shows the type of statistical distribution that Taleb described as "Extremistan" in his popular book "The Black Swan." The frequency is heavy in the middle and higher than expected in the "tails," or the far extremes of the distribution. What this means is that wild events like the Swiss Central Bank bluffing the entire world happen more frequently than risk models suggest.

In their 10-Q filing, JPMorgan boasts that there were no VAR band breaks. Translation: They never had a 1-day loss that exceeded their estimates of about $50 million – although they did come uncomfortably close in March. Just like a typical swashbuckling bank that throws around billions of depositors' FDIC-insured money on convoluted derivative bets, JPMorgan is only concerned about downside volatility while ignoring upside volatility. Yes, they didn't have any downside VAR breaks, but anyone can look at the chart and see there were multiple instances where they made more than $50 million in a single day, with the Swiss bank debacle being the most notable one. Veteran traders know that this kind of wild upside can be just as great of a risk as unexpected downside. If you can make $200 million in a single day, you can also lose the same amount – especially when the P/L comes from linear non-derivative sources like the spot currency market. In this case, JPMorgan happened to be on the right side of the tidal wave. However, Citigroup, Deutsche Bank, and Barclays got caught in the crossfire, and they lost a combined $400 million on the franc. Just another day in casino capitalism.

Original source at: zero hedge - on a long enough timeline, the survival rate for everyone drops to zero | http://www.zerohedge.com/news/2015-06-15/what-volcker-rule-loophole-looks

Outlook 2014– Geopolitical Tensions – The Middle East, Russia, China, Japan and the U.S.– Ultra Loose Monetary Policies Set To Continue with Yellen as New Federal Reserve Chair– Eurozone Debt Crisis Again – UK, U.S. Japan and China Also Vulnerable– Enter The Dragon – Chinese Gold Demand Paradigm Shift To Continue– Death Of Indian Gold Market Greatly Exaggerated– Long Term (2014-2020) MSGM Fundamentals

Conclusion

IntroductionHappy New Year. We would like to take this opportunity to wish our clients and subscribers a prosperous, healthy and happy 2014.

With 2013 having come to a close, it is important to take stock and review how various assets have performed in 2013, assess the outlook in 2014, and even more importantly, the outlook for the coming years.

2013 was the year of the speculator and the year of the risk asset, such as equities, with global stocks doing well in the sea of liquidity and cheap money created by central banks.Surprisingly to many gold bulls, these favourable monetary conditions did not lead to higher precious metal prices. Gold and particularly silver had a torrid year and significantly underperformed the vast majority of equity and bond markets.

The MSCI World Index was up 23% and the S&P 500, the Nasdaq and the FTSE were up 32%, 35% and 14% respectively.

MSCI World Index – 1970 to January 3, 2014 – Bloomberg

Bond investors did not fare as well as interest rates began to rise from all-time record lows. As bond prices fell, interest rates rose. The bellwether 10-year Treasury note closed the year at 3.028%, which was up from 1.76% at the start of 2013 and the highest since July 2011.

US 10 Year Note – 1964 to January 3, 2014 – Bloomberg

The Barclays US Aggregate bond index, which is dominated by Treasury, mortgage and corporate bonds and is the leading benchmark followed by institutional money, is set to record its first negative year of total returns since 1999. The bond market’s major benchmark registered a total return of minus 2.1% for 2013. It is only the benchmark’s third annual negative total return since 1976, according to Barclays.

REVIEW OF 2013

Gold and Silver Have a Torrid Year – Fall 28% and 36% RespectivelyGold fell in all major currencies in 2013 and fell 28% in dollar terms for its first annual price fall since 2000. Gold fell 40% in pound terms, 45% in euro terms. Gold fell much less in Japanese yen terms and was 16% lower in yen as the yen continued to be devalued and debased.

Silver was down by 36% in dollar terms and by more in the other currencies; silver had its poorest annual performance since 1984.

Gold came under pressure in the first half of 2013 and saw falls from near $1,700/oz at the start of the year to $1,180/oz by mid-year. Indeed, gold’s low for the year took place on June 28th, which was the last day of trading in Q2, and an important time frame for those evaluating gold’s longer term performance.

The price falls in the first half took place despite a positive fundamental backdrop and despite the risk of contagion in the Eurozone – especially from Spain, Italy and Greece. This risk was so great in the early part of the year that it led George Soros to warn in February that the Eurozone could collapse as the U.S.S.R. had.

In March, Cyprus was the first country to experience a bank bail-in of depositors, where both individual and corporate account holders, experienced capital controls and a confiscation of nearly 50% of their deposits. In June and then again two weeks ago, the EU confirmed that depositors will be bailed in when banks are insolvent.

International monetary and financial authorities globally, including the ECB, the Bank of England and the Federal Deposit Insurance Corporation (FDIC), have put in place the regulatory and legal framework for bail-in regimes in the event of banks failing again.

Are Your Savings Safe From Bail-Ins

Gold saw a bit of a recovery in the third quarter with gains in July and August as gold interest rates went negative, bullion premiums in Asia surged and COMEX inventories continued to fall. Silver surged 12% in 5 trading days in mid August due to record silver eagle coin demand and ETF demand.

UK gold ‘exports’ to Switzerland increased greatly during the year due to demand for allocated gold in Switzerland due to Switzerland’s tradition of respecting private property throughout the centuries and its strong economy. However, more importantly, UK gold exports to Switzerland were due to the significant increase in store-of-wealth demand from China and many countries in Asia.

Institutional gold in the form of London gold delivery bars (400 oz) was exported to Swiss refineries in order to be recast into one kilogramme, 0.9999 gold bars used on the Shanghai Gold Exchange and in the Chinese market.

However, this was not enough to prevent further falls in the final quarter and in recent days when gold has again tested support at $1,200/oz.

Year Of Technical, Paper Selling But Robust Physical Demand

German Gold RepatriationThe year began with a bang, when news broke on January 17 that the German central bank was attempting to repatriate Germany’s gold reserves. The Bundesbank announced that they will repatriate 674 metric tons of their total 3,391 metric ton gold reserves from vaults in Paris and New York to restore public confidence in the safety of Germany’s gold reserves.

Bundesbank – Goldbarren

The repatriation of only some 20% of Germany’s gold reserves from the Federal Reserve Bank of New York and the Banque of Paris back to Frankfurt was meant to allay increasing German concerns about their gold reserves. But the fact that the transfer from the Federal Reserve is set to take place slowly over a seven year period and will only be completed in 2020 actually led to increased concerns. It also fueled concerns that the unaudited U.S. gold reserves may be less than what is officially recorded.

What was quite bullish news for the gold market, saw gold quickly rise by some $30 to challenge $1,700/oz. The news was expected to help contribute to higher prices but determined selling saw gold capped at $1,700/oz prior to falls in price in February.

Paper Selling On COMEXGold’s falls in 2013 can be attributed in large part to paper selling by more speculative players on the COMEX. This was graphically seen in April when there was a selling raid on the COMEX which led to a huge price fall of nearly 15% in two days prior to the emergence of “extraordinary” demand for gold internationally.

The sell off came as demand in Europe began to pick up due to concerns that the Cypriot deposit confiscation may be a precedent that could be seen in other EU countries.

The speed and scale of the sell off was incredible and even some of the bears were surprised by it. Many questioned the catalysts for the $150 two day sell off. The sell off was initially attributed to an unfounded rumour regarding Cyprus gold reserve sales – this was soon seen to be a non-story. The Cyprus rumour did not justify the scale of the unprecedented sell off.Reports suggested that a single futures sell order worth $6 billion, equal to 4 million ounces or 124.4 tonnes of gold, by a large investment bank sent prices plummeting. The futures market then saw a further wave of selling of contracts worth some $15 billion, equivalent to 10 million ounces of selling or 300 tonnes, in just 35 minutes.Gold futures with a value of over 400 tonnes were sold in a handful of trades in minutes. This was equal to 15% of annual gold mine production. The scale of the selling was massive and again underlines how one or two large banks or hedge funds can completely distort the market by aggressive, concentrated leveraged short positions.

Investment banks and hedge fund speculators can manipulate the paper or futures gold price in whichever direction they want in the short term due to the massive leverage they can utilise. The events in April further bolstered the allegations of manipulation by the Gold Anti-Trust Action Committee (GATA).

Significant Demand For Physical Gold GloballyGold prices fell very sharply despite very high demand. However, the gold price decline was arrested by the scale of physical demand globally. This demand was particularly strong in the Middle East and in Asia, particularly China but was also seen in western markets with government mints reporting a surge in demand in 2013.

This demand for physical gold was seen in western markets throughout the year. In April, the US Mint had to suspend sales of small gold coins; premiums for coins and bars surged in western markets due to high demand.

Mints, refineries and bullion brokerages were quickly cleared out of stock in April and COMEX gold inventories plummeted. There were gold and silver coin and bar shortages globally.

This continued into May as investors and savers globally digested the ramifications of the Cypriot deposit confiscation. The crash of the Nikkei in May also added to physical demand in Japan and by nervous investors internationally.

This led to all time record gold transactions being reported by the LBMA at the end of May.

Chinese demand remained very robust and Shanghai Gold Exchange volumes surged 55% in one day at the end of May – from 10,094 kilograms to 15,641 kilograms. There were “supply constraints” for gold bars in Singapore and bullion brokers in Singapore and India became sold out of bullion product at the end of May.

This, and concerns about a very poor current account deficit and a possible run on the Indian rupee, prompted the Indian government to bring in quasi capital controls and punitive taxes on gold in June. Ironically, this led to even higher demand for gold in the short term and much higher premiums in India. Longer term, it has led to a massive surge in black market gold buying with thousands of Indians smuggling in gold from Bangkok, Dubai and elsewhere in Asia.

June saw another peculiar sudden 6% price fall in less than 24 hours. This again contributed to increased and very robust physical demand. U.S. Mint sales of silver coins reached a record in the first half of 2013 at 4,651,429 ounces and the UK’s Royal Mint saw a demand surge continuing in June after demand had trebled in April.Asian markets continued to see elevated levels of gold buying. Gold demand in Vietnam was so high that buyers were paying a $217 premium over spot gold at $1,390/oz. Premiums surged again in China as the wise Chinese ‘aunties’ and wealthy Chinese continued to buy gold as a store of wealth.

Despite very high levels of demand for gold, in Asia especially, gold languished and sentiment in western markets continued to be very poor with gold falling to the lows of the year on June 28th.

July saw continuing strong demand for gold internationally as volumes surged to records on the Shanghai Gold Exchange (SGE). Premiums rose and feverish buying left many of Hong Kong’s banks, jewellers and even its gold exchange without enough gold bullion to meet demand.

In August, demand remained elevated and gold forward offered rates (GOFO) remained negative and became more negative. This showed that physical demand was leading to supply issues in the highly leveraged LBMA gold market or the institutional gold bar market.

Today, as we enter the New Year gold, forward offered rates (GOFO) remain negative, meaning banks, which had lent their customers gold to obtain a positive return, and therefore increase the “paper” gold supply, will take the gold back. This should limit the amount of gold on the market and increase the gold price.

Chinese buyers are of increasing importance but it is important to note that physical demand rose significantly throughout the world in 2013 despite falling prices. This is seen in the levels of demand experienced by leading bullion dealers, refiners and government mints. This is clearly seen in the data released by the Perth Mint and the U.S. Mint which both saw increased demand for physical gold coins and bars in 2013. Other mints have yet to report their numbers.

The Perth Mint of Western Australia reported yesterday that they saw a very significant increase in sales in 2013 despite the falling prices. Gold sales from the Perth Mint, which refines most of the bullion from the world’s second-biggest producer Australia, climbed 41% last year.

Sales of gold coins and minted bars totalled 754,635 ounces in 2013 from 533,333 ounces a year earlier, according to data from the mint.

Silver coin sales surged 33% to about 8.6 million ounces from 6.5 million ounces in 2012, according to the Perth Mint.

Gold bullion sales expanded 12% to 58,944 ounces in December from 52,700 in November and about 51,778 ounces in December 2012, according to data from the mint. Gold sales fell to as low as 30,430 ounces in August and peaked at about 112,575 in April, when gold was hammered 14% lower on the COMEX in just two days.

Silver coin sales were 845,941 ounces last month from 807,246 in November and 452,389 a year earlier, it said.

The U.S. Mint also saw an increase in physical gold sales and sold 14% more American Eagle gold coins last year and sales climbed 17% to 56,000 ounces in December from November, according to data on the mint’s website as reported by Bloomberg.

Syria and the Middle EastEven bullish developments such as the prospect of war in Syria at the end of August, only led to small, short term price gains. War in Syria and in the Middle East, pitching the U.S. and western allies against China and Russia was expected by many to lead to “market panic” and to propel gold “much, much higher,” in the words of astute investor Jim Rogers.

Only the fact that President Obama and the U.S. were confronted with opposition by people internationally against another war and were outmaneuvered diplomatically, prevented the war with Syria.

The war had the potential to destabilise the region with ramifications for oil prices and the global economy.

U.S. Government Shutdown and $12 Trillion Default RiskAnother very bullish development for gold came in late September and early October with the U.S. budget negotiations and government shutdown.

They highlighted the dire U.S. fiscal position and the complete failure of the American political and economic class to deal with their extremely precarious financial position in any meaningful way. The U.S. government is essentially bankrupt with a national debt of over $17 trillion and unfunded liabilities of between $100 trillion and $200 trillion.

In the coming months and years, it will lead to a lower dollar and much higher gold and silver prices.

However, in the year of paper gold selling that was 2013, even this did not lead to higher gold prices.

Central banks continued to be strong buyers of gold in 2013, albeit the full year data may show demand was at a slightly slower rate than the record levels seen in recent years. Q4 2013 will be the 12th consecutive quarter of net purchases of gold by central banks.

Total official central bank demand continued at roughly 100 tonnes every single quarter. However, this does not include the ongoing clandestine and undeclared purchases of gold by the People’s Bank of China. Conservative estimates put PBOC demand at 100 tonnes a quarter or at over 400 tonnes for the year. More radical projections are of demand of over 1,000 tonnes from the PBOC in 2013.

Regulatory Authorities Investigate Gold RiggingPeculiar, single trade or handful of trades leading to sudden gold price falls were common in 2013 and contributed to the 28% price fall.

Therefore, those who have diversified into physical gold will welcome the move by the German financial regulator BaFin to widen their investigation into manipulation by banks of benchmark gold and silver prices. In December, the German banking regulator BaFin demanded documents from Germany’s largest bank, Deutsche Bank, as part of a probe into suspected manipulation of the gold and silver markets.

The German regulator has been interrogating the bank’s staff over the past several months. Since November, when the probe was first mentioned, similar audits in the U.S. and UK are also commencing.

Precious metal investors live in hope but their experience of such investigations is that they are often very lengthy affairs with little in the way of outcome, disclosure or sanction. The forces of global supply and demand, one anemic, the other very high, are likely to be more important and a valuable aid to gold and silver owners in 2014 and in the coming years. As ultimately, the price of all commodities, currencies and assets is determined by supply and demand.

Janet Yellen Becomes Fed Chair

At year end came confirmation that cheap money uber dove Janet Yellen was set to take over from Ben Bernanke as Chair of the Federal Reserve. Gold bulls cheered loudly at her appointment thinking that Yellen’s appointment would lead to a recovery in oversold gold prices. However, even this bullish development did not help embattled gold prices.

OUTLOOK FOR 2014

Introduction

2013 was a year of calm in the world of finance. 2014 may not be so calm and there is a risk of renewed turbulence on global financial markets. There are many unresolved risks which were present in 2013 but did not come to the fore and impact markets as they could have.

The Eurozone debt crisis is far from resolved and there remains an underappreciated risk of sovereign crises in other major industrial nations.

There are far more positives for gold than negatives and the positives include ultra-loose monetary policies, risk of sovereign and banking debt crises and systemic or contagion risk, the increasingly uncertain political and military situation globally and of course increased demand for gold from the Middle East, much of Asia and particularly China.

Over the weekend, I met with John Titus, Executive Producer of the new documentary film “Bailout: The Dukes of Moral Hazard,” which tells the story of individual Americans affected by the financial bust. Myself, Yves Smith and other members of the blogerati are featured in the film.

We talked about why the film seems to connect with people at a viseral level. Our conclusion is that the clarity and hilarity comes from the choice of our late friend John Fox as narrator.

The subject matter of “Bailout” had to pass through the keen, irreverant perspective that John Fox, a veteran television writer and later stand up commedian, brought to all of his work. When the man who opened for Rodney Dangerfield for eight years tells you about the subprime crisis, it somehow makes sense.

But even though Bailout Director Sean Patrick Fahey vividly presents the impact of the crisis on home owners, there is another part of the story that remains untold, namely the hundreds of billions of dollars in losses borne by investors. Incredibly, the vast majority of the losses on residential mortgage backed securities (RMBS) and toxic derivatives like collateralized debt obligations (CDO) have been left on the table.

Consumer and legal advocates, and politicians, focus most of their attention on the impact of the crisis on home owners and communities. No surprise since this is where the heat is politically. Likewise for the media, back to the point about John Fox in the role of interlocutor, the most easily understood and conveyed part of the crisis is found in the world of consumer real estate and foreclosures. Talking about the role of a trustee in an RMBS trust quickly causes the eyes to glaze, but that same complexity and unattractiveness creates vast opportunities for fraud.

I had an interesting conversation last week with a several consumer advocates who also understand the world of loan servicing in an intimate fashion. These advocates have been successfully defeating foreclosure petitions in states such as New Jersey because the servicers lack the ability to prove their right to proceed to foreclosure. That is, the party attempting to foreclose does not have the mortgage note and often cannot even document precisely who is supposed to own the note.

What many consumer advocates and politicians don’t seem to want to understand is that the chaos in the courts with respect to the robo signing mess is a big hint about a whole other area of criminality: securities fraud. The same systemic inefficiency that makes it difficult for servicers to foreclose on a mortgage with defects in the chain of possesion of the note also enables fraud. Wall Street firms such as Countrywide, Lehman Brothers and Bear Stearns reportedly double-pledged tens of billions of dollars worth of real and ficticious mortgages. And there has been zero interest from the Obama Administration or state attorneys general in pursuing these claims.

Back in February I wrote a comment for Housing Wire, Eric Schneiderman delves into housing, outlining some of the areas where the NY AG could act to address systemic fraud on Wall Street.

But the trouble is that Scheiderman has done nothing. It seems that the entire system of government in the US has been compromised by the TBTF banks. From the Federal Reserve Board in Washington to the office of the US Attorney to the various state AGs to the world of Buy Side managers, nobody has any interest in asking difficult questions about the provenance of the collateral underlying a significant — as in double digit percentages of some RMBS and CDOs.

Based upon my discussions with managers and also Sell Side firms involved in the liquidation of asset classes like CDOs, for example, loss rates are running close to 60% on the total $700 billion plus in securities issued. And something like 2/3rds or more of the principal amount of loss to investors remains on the table, with no claims filed in the courts. We are talking about tens of billions of dollars in losses, mostly to Buy Side end investors like pension funds, insurers and funds. Mad now?

The claims here have effectively been abandoned by the supposed managers and advisors. These orphan claims could be pursued by either public sector or private parties, yet nothing is done. Why? Let’s go through the casual chain of complicity and inaction.

First we start with the Fed, OCC, FDIC and other regulators. From the acquisition of Countrywide Financial by Bank of America, to the acquisition of Bear Stearns and Washington Mutual by JPMorgan, the objective has always been to preserve primary dealers at all cost. This means the Fed must keep the lid on disclosure of the true asset quality of these TBTF originator/servicr banks, both on balance sheet and in the trillions of dollars in off-balance sheet RMBS securitizations and CDOs sponsored by these banks. This also means that my friends at the FDIC are sometimes unknowingly on the wrong side of disputes involving the chain of title on collateral.

Likewise in the case of Lehman Brothers, the bankruptcy process served to obscure the issue with respect to fraud. As I noted in earlier posts, the trustee in a bankruptcy does not have the power to pursue fraud by third parties. Only a receiver appointed by a federal district court a la The Stanford Group fraud has this power. See the evergreen copy of The IRA Institutional Risk Analyst comment on ZH: “The IRA | It’s All About the Fraud: Madoff, MF Global & Antonin Scalia.

Thus when a financial institution files for bankruptcy, unless the creditors understand their right to ask to the appropriate federal district court for the appointment of a receiver, the chances of recoveries and equity fall dramatically. In a bankruptcy, the officers and directors will almost always walk away scott free — unless a loss to an insured depository allows the FDIC to sue under US banking laws. FDIC has power to protect the Deposit Insurance Fund (DIF) from loss and, more important, to be advocate for uninsured depositors and other bank creditors as well.

Note that the payout waterfall in an FDIC insured bank in liquidation is different because the uninsured depositors are next in line after the insured deposits covered by the DIF. Note too that in the case of a bank failure the FDIC is not merely trustee of the dead bank, but rather receiver with quasi judicial, Article I powers to protect the interests of third party creditors, including depositors, vendors, etc. FDIC also has expedited access to the federal, Article III courts to compell obedience with its findings as receiver.

Think of the appointment of an equitable reciever in a bankrtupcy like MF Global as a more general way to apply the same power weilded by FDIC as receiver to all types of fraud. The unfortunate situation with MF Global illustrates the dilema facing the trustee in that case. I will write a more detailed post on ZH regarding MF Global to discuss the actions of the trustee. If anybody out there can get me on the phone withe the counsel for the MF Global Bankruptcy Trustee I will put them in touch with my mentors on this issue.

Ask yourself a question: Just why did BAC have to buy Countrywide? Was the driver of that transaction merely that BAC was the warehouse lender to Countrywide? Or was the issue more complex, namely that the target had billions of dollars in ficiticious assets on its balance sheet, bogus securities that were in some cases used as collateral in repurchase transactions. It can be argued that BAC’s warehouse for Countrywide was the engine for vast fraud.

Likewise with Lehman Brothers, nobody could buy the firm in its totality because nobody could or would attest to the assets, on or off balance sheet. There was literally nobody who could or would sign off on representations and warranties needed to sell the company. And the proverbial bodies were then burried in bankruptcy without the benefit of a receiver, allowing former CEO Dick Fuld and his cohorts to walk away without any criminal sanctions for what seem like obvious, dliberate acts of accounting and securities fraud.

With Bear Stearns and Washington Mutual, JPM CEO Jamie Dimin likewise provided the cover to keep these two rancid situtations under wraps and away from close scrutiny. Recall when during the last US presidential campaign, Senator John McCain (R-AZ) famously said that we would go through the subprime mess “loan by loan?” That was the end of John McCain’s presidential run as far as Wall Street was concerned, says one industry insider.

President Obama, by comparison, has been very accommodating to the TBTF banks and their agenda to hide the ball when it comes to systemic securities fraud on Wall Street. Remember we are talking about loss rates about 50% for production from Bear Stearns, for example, yet none of the responsible parties in the creation of these toxic securities have been indicted.

Now you will notice there has been no discussion fo the SEC in this tirade. The SEC has done nothing, squat, buptkus with respect to systemic fraud on Wall Street. And as we have noted afore this, the Fed and other regulators are complicit in allowing these hideous zombies to merge to avoid resolution and bankruptcy. The Merrill transaction with BAC, for example, brings along $30 billion in existing litigation due to CDOs. But this number is still a fraction of the totality of the losses on this asset class.

So if the politicians and supposed officers of the federal and state courts have been bought off when it comes to pursuing criminal and even civil claims related to various flavors of fraud involved with the origination and sale of mortgages, what about the managers, trustees and custodians of RMBS trusts? Sadly, there are no advocates real or imagine in this group either, except in those rare exceptions where managers have been willing to go to war with some of the biggest firms on Wall Street.

The simple fact is that the nominee trust of today’s financial markets is a sham. The trustee appointed by the sponsor of the deal is essentially ministerial in function, with neither the funding nor the mandate to act as an advocate for investor interests. The custodians of these trusts have likewise not historically acted as advocates for investors, although there are some notable exceptions.

Bank of New York’s DE chancelery court litigation against BAC behalf of Countrywide bond holders is one rare example. And the moves by US Bancorp and Deutsche Bank to sue sponsors of deals where they acted as custodian to ingratiate themselves with NY AG Schneiderman is another example. But of course the two biggest players in the market, BAC and BK, have yet to sue themselves for the deals in which they were involved together.

Unlike an FDIC bank resolution where the receivership can pursue officers and directors for acts of fraud, in cases such as Maddoff and MF Global, the trustee is hamstrung in pursuing third party claims. Likewise the investors in an RMBS trust or CDO must organize themselves to pursue claims. They must pay and indemnify the trustee, who then hires counsel and sues the sponsor. But only in a small minority of deals has a claim been filed.

Aside from the legal and operational issues facing investors who want to sue deal sponsors for fraud, the fact is that managers don’t want to sue because, during discovery, it will be shown that they made bad investmnt choices. That is a generous description. Less generous is to say that the manager does to want admit publicly buying a “bag of shells” in terms of diligence on deals.

Nobody on the Buy Side wants to sue JPM, Goldman Sachs, Morgan Stanley et al for securities fraud on the more problematic deals of the past decade. Buy Side asset managers who sue the largest Sell Side sponsors become pariah, excluded from the flow of deals and information. But you have to wonder if the damage these passive managers are doing to investors and the US markets by not zealously pursuing legal claims against the sponsors of RMBS and CDOs is not a worse outcome at the end of the day.

If we take Schneiderman’s statement that nothing is “off the table” in terms of prosecuting acts of fraud, an ideal outcome here, IMHO, would be the following:

1) NY AG Schneiderman goes into federal court next week and files a motion removing BK as custodian with respect to all RMBS trusts governed by NY law. Schneiderman should ask the court to appoint a receiver with respect to all of the trusts where BK was custodian and immediately investigate whether fraud and professional malfeasance occurred.

2) Schneiderman asks the court to appoint a receiver with respect to BAC because of ongoing acts of fraud and the recalcitrance shown to the court. Several federal courts have already found BAC to be engaging in “deliberate delay,” discovery abuse and other acts of bad faith in the various lawsuits now underway. These acts of contempt of court alone are sufficient reason to apppoint a receiver with respect to BAC.

3) And come to think of it, while Schneiderman is in the court house, he can file an emergency motion to intervene in the MF Global bankruptcy and ask the court to appoint James W. Giddens as receiver in that matter. Schneiderman has standing to bring this motion and could ask the IL AG and US attorney to join him in making the representations to the court. Then we wipe that grin off Jon Corzine’s face and start to make some real progress on MF Global. More tomorrow.

Original source at: zero hedge - on a long enough timeline, the survival rate for everyone drops to zero | http://www.zerohedge.com/contributed/2012-06-10/its-all-about-fraud-silence-buy-side